Proposal to Expand U.S. National Labor Relations Board Program (*7*)Common employer principle could transform the relationship between franchisors and franchisees, potentially revolutionizing the franchising business model as we know it.
While this provision is intended to guard employees’ rights and ensure fair labor practices, it also brings with it some serious challenges for franchise owners.
Where the rule applies
Although the joint employer provisions have been expanded, blocked for nowcontinues to pose a potential threat to the franchise industry. Franchise owners must remain vigilant and prepared for the possibility of it being revived via the Court of Appeal.
Advocate Jim Paretti labor law office Little Mendelson he said Entrepreneur Earlier this yr, he said what he thought the industry would appear to be once the expanded rules were introduced.
“If I’m a national franchisor, I have two options,” Paretti said. “One is to completely withdraw as much as possible — which is the opposite of what you want a franchisor to do — leaving franchisees in the lurch. Or, alternatively, I’ll swing the hammer. If any control is going to hold me accountable, I’m going to exercise a lot of control over each franchise.”
That would essentially turn the franchise’s former owners into glorified managers. “That’s not what anyone signed up for when they bought the franchise,” Paretti said.
The long-term effects on the franchise industry and the broader economy remain uncertain, but franchise owners must navigate these potential changes rigorously to sustain and grow their businesses in this changing landscape. Here’s a closer look at the ways this proposed rule could impact franchises.
Increased liability for franchisors
The proposed laws could hold franchisors liable for labor violations committed by their franchisees. This increased liability means franchisors could face lawsuits and penalties for actions beyond their direct control. Such legal risks could discourage franchisors from expanding their networks or investing in recent franchises, ultimately hindering growth and innovation.
Higher compliance costs
Faced with the threat of increased liability, franchisors will likely need to extend oversight and compliance measures. This may include regular audits, comprehensive training programs, and meticulous recordkeeping. These needed steps come at a high cost, potentially passed on to franchisees or reflected in higher upfront fees for recent franchisees.
Limited autonomy for franchisees
To avoid being classified as collaborators, franchisors may implement stricter controls over franchisees’ operations. This may mean standardized hiring practices, mandatory training programs, and uniform work rules. Such strict controls reduce franchisees’ autonomy, limiting their ability to adapt to local markets and potentially stifling innovation and local responsiveness.
Increase in operating costs
Franchisees may face rising operating costs resulting from the implementation of standardized work practices and compliance requirements. These additional expenses can include administrative burdens, increased payroll costs, and the need for legal assistance to navigate recent regulations. Rising operating costs can reduce profit margins, making it harder for franchisees to remain in business.
Entry barrier for recent franchisees
The proposed regulations could create a tougher environment for aspiring franchisees. Increased legal and compliance risks, along with higher upfront costs, could discourage individuals from investing in franchises. This could limit entrepreneurial opportunities and slow the overall growth of the franchise sector.
Impact on franchise relationships
The dynamic between franchisors and franchisees may grow to be strained under the recent regulations. Franchisees could also be unhappy with the increased oversight and lack of autonomy, while franchisors may struggle with the added burden of compliance. This tension can result in conflict and a weakening of the franchise network, potentially affecting the overall strength and consistency of the brand.
Broader economic implications
The broader economic implications of the proposed rule are significant. Franchises play a critical role in the economy, creating jobs and driving local economic growth. Increased costs, reduced expansion, and potential closures resulting from the recent rule could result in job losses and decreased economic activity. The negative impact on the franchise sector could ripple through to suppliers, landlords, and other businesses that rely on the thriving franchise industry.
Summary
While the proposed Joint Employer Rule is intended to guard employees and promote fair labor practices, it poses significant challenges for franchise owners. Increased liability, higher compliance costs, reduced autonomy, and potential economic spillovers are just a few of the ways franchises might be affected.
The long-term implications for the franchise industry and the broader economy remain uncertain, but franchise owners must navigate these changes rigorously to sustain and grow their businesses in this changing environment.